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India's first spare parts case: the intellectual property defence in Indian antitrust law

Journal of Intellectual Property Law & Practice (2014) doi: 10.1093/jiplp/jpu213, first published online: November 10, 2014

The Competition Commission of India adopts the essential facilities doctrine in ‘refusal to deal’ cases, denies competence to question the validity of an intellectual property right and explains the scope of the statutory exemption for holders of intellectual property rights to enter into anti-competitive agreements.

Legal context

The Indian Competition Act 2002 has been in force since 2009. Sections 3 and 4 prohibit anti-competitive agreements and abuse of dominance respectively. Extensive penalties have been prescribed for a violation of these prohibitions.

Section 3(5) specifically considers the interest of intellectual property holders as granted under various Indian statues and exempts any ‘reasonable conditions, as may be necessary for protecting any of his (IP) rights …’. Thus far, the Competition Commission of India (CCI) had not adjudicated upon the interface between IP and competition policy in India. However, there has been a series of recent investigations which bring this interface to the fore—FRAND licensing in the case of standard essential patents (SEP) in Micromax v Ericsson (Competition Commission of India, Case No. 50/2013, MANU/CO/0066/2013), pharmaceutical settlements between patent holders and generic manufacturers and so on.

In this context, the CCI's order in Kataria, India's first spare parts case, gains much significance. The interface of IP and antitrust in the case of spare parts has evoked conflicting decisions in the United States in Kodak II (Image Technical Services Inc. v Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997)) and Xerox (Re Independent Services Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000)). In contrast, the European Union has provided for a block exemption with stricter antitrust rules specifically for motor vehicle spare parts. Besides its relevance for spare parts, CCI has also made general observations about the scope of the IP defence which has significant practical implications.

Facts

Automobile manufacturers operating in India were alleged to have been indulging in anti-competitive practices by not making genuine spare parts for these automobiles freely available in the open market. Instead, those manufacturers operated or regulated authorized workshops which sold such spare parts in addition to rendering after-sale maintenance services. Even the technological information, diagnostic tools and software programs required to provide such services efficiently were not freely available to the independent repair workshops. As a result, only authorized workshops were able to sell spare parts or provide maintenance services at higher (or even monopolistic) prices.

It was contended that these practices constituted an abuse of dominance (s 4) by denying market access to independent repair workshops, limiting the production of goods or provisions services and leveraging. The agreement between the manufacturer and the authorized workshop was argued to be anti-competitive as it amounted to a ‘refusal to deal’ and to an ‘exclusive supply agreement’ having an ‘appreciable adverse effect on competition’.

Among the manufacturers' objections, two are relevant from an IP perspective: the ‘essential facilities’ doctrine and the defence under s 3(5). Briefly for ‘essential facilities’, the manufacturers argued that there was no restriction on independent manufacturers producing the same spare parts, and that it was not feasible for them to make spare parts available in the open market. As regards the exemption under s 3(5), it was maintained that such conditions were necessary to protect the proprietary information in relation to spare parts, which was covered by various IP rights—patents and designs for spare parts—and copyright in the technical manuals and the engineering drawings. Further, such conditions were reasonable as they ensured the safety and quality of the products and services.

Analysis

To evaluate whether there was an abuse of dominance, ‘relevant market’ had to be determined. The CCI concluded that the relevant market was restricted in its scope to each manufacturer's automobiles as spare parts were not substitutable as between manufacturers. Automatically, therefore, each manufacturer was in a dominant position with respect to its automobiles especially so since the substitution costs were so very high, involving a change of car.

In its analysis on whether there is a ‘refusal to deal’ leading to a violation of s 4(2), the CCI held that, since there is no equivalent to s 3(5) under s 4, there is no IP defence against an alleged abuse of dominance:

[I]f an enterprise is found to be dominant pursuant to explanation (a) to section 4(2) and indulges in practices that amount to denial of market access to customers in the relevant market; it is no defence to suggest that such exclusionary conduct is within the scope of intellectual property rights of the OEMs.

At first, this appears to be a significant blow to IPR in general. Indeed, an IP holder does not have the obligation to deal with its competitors (see eg s 48 of the Indian Patents Act 1970). However, two limiting principles may be deduced from the CCI's reasoning. First, the IP holder needs to be in a ‘dominant position’. Merely by virtue of holding an IP, a person may not be in a dominant position as there may still be another product substitutable with the product in which the IP exists. Secondly, while CCI does not expressly adopt the ‘essential facilities’ doctrine, its reliance on the same is clear from the decision. It refers to two decisions of the Court of Justice of the European Union in Commercial Solvents ([1974] ECR 223) and United Brands ([1978] ECR 207) to hold that there would be an abuse if the dominant enterprise refused to deal in essential inputs in order to exclude competition in a derivative market.

The Director General (investigative authority under the Competition Act) relied on the elements laid down by the Seventh Circuit in the USA in MCI v AT&T (708 F 2d 1081 (7th Cir 1983)). The US approach to ‘essential facilities’ (explained in Trinko, 540 US 398 (2004)) is much narrower in scope than its EU counterpart. However, it is more likely that the EU approach will be followed in the future as well.

The CCI then considered the IP defence under s 3(5) while determining the existence of an anti-competitive agreement between the manufacturer and the authorized seller or workshop. To begin with, CCI correctly observed that it is

not the competent authority to decide, for example if a patent/trademark that is validly registered under the applicable laws of another country fulfils the legal and technical requirement or is capable of being registered under the Indian IPR statutes, specified under section 3(5) of the Competition Act.

This is a welcome observation. To prove the existence of an IP right protected by the statutes listed under Section 3(5), the person must adduce adequate documentary evidence. It is the subsequent analysis of CCI which is deeply problematic.

First, the CCI drew a distinction between the right to exploit an IPR and the IPR itself, holding that the former is not protected by s 3(5). This appears to contradict the text of the exemption which refers to ‘any person’ and not just the enterprise alleged to have violated s 3.

Secondly, with regard to non-registered IP such as copyright, the CCI states that no such copyright can exist in engineering drawings as it should have been registered as a design instead (s 15 of the Copyright Act 1957). Not only does the CCI adjudicate upon the existence of the IP right (contrary to the quote above): it also completely skirts the issue of copyright over technical manuals and software programs.

Thirdly, in evading the issue of the existence of the IP right, the CCI held that, in any event, the conditions are unreasonable: manufacturers can sell spare parts in which IP exists even in the open market without compromising the IP. By adequate regulation, even independent service providers would be capable of delivering the same safety and quality of spare parts without any adverse effect to the IP. The CCI lost sight of the proposition that the freedom to not deal with competitors is an inherent right of IP.

Practical significance

For the first time, the CCI in Kataria has fully considered the IP defence in Indian antitrust law. While there is no IP exemption from an allegation of abuse of dominance, the CCI has adopted the EU's ‘essential facilities’ doctrine. This will prove crucial in Micromax, where the issue of FRAND licensing of SEPs has arisen. However, since it appears necessary to adduce documentary evidence to claim the exemption under s 3(5), it is advisable to register the IP under Indian statues to the extent possible. While the CCI has categorically stated that it would not question the validity of the IP, it also essentially held that mandatory licensing would not infringe the IP. This reasoning is clearly flawed and the only limiting principle that can be deduced is that this will be restricted to secondary markets (and derivative products). While the automobile manufacturers will surely appeal this decision to the Competition Appellate Tribunal, these observations are bound to guide the approach of the CCI in antitrust investigations in the near future.

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